MediaTek faces mid-term pain in MStar deal: Nomura

Staff writer, with CNA

Shares of MediaTek Inc (聯發科) and MStar Semiconductor Inc (晨星半導體) surged yesterday following a merger announcement on Friday, but a Japanese brokerage said MediaTek would face short-term gain and mid-term pain.

In a research note, Nomura Holdings Inc said the deal shows the long-term ambition of MediaTek chairman Tsai Ming-kai (蔡明介) and MStar chairman Wyne Liang (梁公偉) to build a global-scale fabless company in view of the rising competition and industry growth over the next three to five years.

“The immediate benefits that we expect are easing competition and better cost negotiating power. However, these are not strong enough to drive the top-two Asia fabless companies to consolidation,” Taipei-based Nomura analyst Aaron Jeng (鄭明宗) said. “We believe the key to the success of the deal is ... execution and resource reallocation.”

Nomura estimates that 80 percent of MStar’s workforce, mainly in handsets and televisions, does the same work as people at MediaTek.

“Our concerns, which we will watch closely, are whether the new MediaTek can retain MStar’s talent and efficiently utilize the overlapping workforces,” he wrote.

Jeng expects long-term synergies to occur from 2015 — two years into the merger — considering that it takes two years to plan and design new products.

MediaTek announced on Friday that it would acquire a stake of between 40 percent and 48 percent in MStar in a tender offer between yesterday and Aug. 13. Under the deal, MStar’s shareholders will get 0.794 MediaTek shares and NT$1 in cash for every MStar share they hold. In the next stage, MediaTek plans to complete the merger early next year.

“MediaTek is working hard to break into major handset brands that would require significant resources,” JPMorgan analyst Nick Lai (賴以哲) wrote in a separate report. “Combining the two teams is probably a better use of resources, instead of competing head-to-head in a similar set of customers.”

However, with MediaTek and MStar claiming a high share of the TV chip market — more than 80 percent combined this year according to a forecast by JPMorgan — a merger might leave TV brands reluctant to source their chips from only one vendor, he said.

Given that a number of TV chip vendors, such as Broadcom Corp, exited the market last year, the deal could open up opportunities for smaller vendors such as Taiwan’s Novatek Microelectronics Corp (聯詠科技) over the longer term, he said. Novatek rose 1.12 percent to NT$90.5 yesterday.